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8 Year-End Tax Tips That Could Save You Money

Consider making these financial moves to help reduce your tax liability and get you closer to your goals

AS THE END OF THE YEAR DRAWS NEAR, it's time to begin thinking ahead to April's federal income tax return filing deadline and consider taking actions with an eye toward minimizing your 2017 tax liability. And while there is talk about reform of the federal tax system in Washington—from getting rid of the alternative minimum tax to eliminating state and local tax deductions—no major restructuring seems likely for the current tax year. Speak with your tax advisor about the best strategies to help meet your financial and charitable giving goals while also possibly reducing what you owe.

Here are some ideas that can help that conversation along. Most of these moves must be made before December 31. But if you don't get to them by the end of this year, they'll be just as useful next year.

1. Contribute the maximum to your 401(k) plan

If you're not on track to reach the maximum contribution amount, think about increasing your contributions through the end of the year. Not enough cash flow? You have until the date your federal taxes are due (in 2018, that’s April 17) to contribute to a traditional IRA for the previous tax year (assuming you meet the income limits). You also have until tax day to make a contribution to a Roth IRA. That won’t give you immediate tax benefits, but it could help to reduce your taxes when you begin to make withdrawals from the IRA.

2. Consider converting your Traditional IRA to a Roth IRA

Although there are income limitations for contributions to a Roth IRA, anyone can convert all or a portion of the assets they have in a Traditional IRA (or other eligible retirement plan) to a Roth IRA, regardless of income or age.

Why might doing so make sense? Unlike with a Traditional IRA, qualified withdrawals from a Roth IRA are generally not subject to federal taxes, as long as you are at least age 59½. But be aware that you will generally be required to pay income taxes either at the time you convert from your Traditional IRA to a Roth IRA, or, if you don't convert, when you retire and take withdrawals from your Traditional IRA. Depending upon your situation, it could make sense to convert and pay taxes now. Consult with your tax advisor before making a decision.

Now may be a good time to consider selling certain investments, in order to lower your capital gains tax liability.

3. Use stock losses to offset capital gains

Now may be a good time to consider selling certain investments, in order to lower your capital gains tax liability. If your portfolio includes underperforming holdings that would generate a capital loss when sold, consider selling them before the end of the year. If you have net capital losses that exceed the yearly capital loss deduction limit of $3,000 ($1,500 if married and filing a separate return) against ordinary income, you can carry over the unused losses to reduce next year's tax liability.

4. Look for tax-aware investing strategies, like tax-free muni bonds

You're subject to a 3.8% Net Investment Income Tax if your income is at least $200,000 ($250,000 for married couples filing jointly or a qualifying widow(er) and $125,000 for married couples filing separately). That tax is levied on the lesser of your net investment income or the excess of modified adjusted gross income over the threshold amount. (Your tax advisor will understand.) Adjusting your investment strategy to be more tax-aware may not ease your tax burden this year, but you may be able to take steps now to help minimize your tax liability going forward. One strategy to consider: investing in tax-free municipal bonds. That way at least a portion of your income would not typically be subject to federal income taxes.

5. Fund a 529 college savings plan

One way to give a tax-free gift to a student of any age is to consider funding a 529 college savings plan account. Generally, you can contribute up to $14,000 per beneficiary annually ($28,000 from a married couple electing to split gifts) and not incur a federal gift tax or use your lifetime gift exemption. You may also be able to contribute up to $70,000 per beneficiary this year ($140,000 from a married couple electing to split gifts) and treat that amount as having been gifted over five years.

6. Lower your taxable income through pre-tax contributions to an HSA

A Health Savings Account (HSA) could let you efficiently pay for qualified medical expenses that are either not paid or only partly paid by your insurance. These accounts, generally available to people who are enrolled in a qualified high-deductible health insurance plan and who do not have additional “disqualifying” non-high-deductible health plan coverage, allow you to sock away pre-tax or tax-deductible contributions for future health-care costs. To take full advantage of this favorable tax treatment, now is the time to make a contribution for 2017 or plan your contributions for 2018.

7. Indulge your generous impulses

The holidays offer a good opportunity to make tax-deductible charitable gifts to the causes you care about—and gifts to the people you love. There are a number of ways you can go about that. First, consider giving a gift of stock to your favorite charity. Look for appreciated shares of publicly traded stocks or mutual funds that you have held for more than a year. By giving them directly to your charity of choice rather than selling them first, you may be able to deduct the current fair market value of the securities and avoid capital gains taxes. Plus, a tax-exempt charity may be able to sell the security without incurring capital gains taxes.

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Age 70½ or older? You may be able to make a qualified charitable contribution of up to $100,000 ($200,000 for married couples filing jointly who each qualify separately) directly from your Traditional IRA to qualified charitable organizations without being taxed on the withdrawal, subject to certain conditions on eligibility for this treatment. The donation would count toward your required minimum distribution (RMD) for the year. (Note that because you are not taxed on the distribution, you cannot claim the donation as a tax deduction.)

While not tax-deductible, when giving to family members, you can give up to $14,000 per year ($28,000 from a married couple electing to split gifts) to as many individuals as you like and not incur federal gift taxes or use your lifetime gift exemption. Generally, once the gift is made, your estate will not pay estate taxes on it and the recipient will not have to treat the gift as taxable income. Read "Why Make Your Heirs Wait" for even more family giving ideas.

8. Prepay some of next year's deductible expenses

Looking for more tax deductions? Consider prepaying future tax-deductible expenses and claiming them this year. For instance, by making your January mortgage payment in December, you may be able to deduct the additional interest expenses on this year's tax return. Another possibility: You may be able to accelerate business expenses, charitable donations or even estimated state income taxes.

3 Questions to Ask Your Advisor

  1. What are some tax-efficient investing moves I may want to consider?
  2. Might a donor-advised fund be a good fit for my giving goals?
  3. Can I make an IRA contribution if my spouse has a 401(k) through his or her job?

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This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice. If you have questions regarding your particular health care situation, please contact your health care, legal or tax advisor.

Always consult your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.

This material does not take into account your particular investment objectives, financial situations, or needs and is not intended as a recommendation, offer, or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances, and if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of issue.  

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